EC backs ECB bid for clearinghouse oversight

LONDON, Oct 4 (IFR) - The European Commission has backed The European Central Bank’s bid to gain regulatory authority over central counterparty clearinghouses, including those that operate from third-country regimes.

In an opinion paper, the EC “strongly welcomed” the ECB’s June recommendation to amend Article 22 of the Eurosystem statute, enabling the central bank to regulate clearing systems “for monetary policy purposes”.

The amendment is a crucial legal step in Europe’s bid to take control of euro-denominated swaps clearing once the UK leaves the bloc in 2019. Recent commission proposals to update the European Market Infrastructures Regulation would grant ESMA and the ECB powers to force the most systemically-important clearinghouses handling euro-denominated contracts to relocate within the European Union.

London-based LCH currently clears €1.3trn daily notional of euro-denominated interest rate swaps in its London-based SwapClear platform, accounting for over 90% of activity in the contracts by eurozone banks.

In its opinion letter, the commission recommended some adjustments to the ECB’s proposal to ensure consistency of regulatory powers between the ECB, European Parliament, European Council and the European Commission with regard to clearing systems.

The opinion formalises the commission’s support for enhanced ECB oversight of CCPs. In a September letter of intent, EU president Jean-Claude Juncker called for swift adoption by co-legislators of all Capital Markets Union proposals, including the ECB’s recommendation to amend Article 22.

Patrick Pearson, head of financial market infrastructure and derivatives at the European Commission, last week reiterated his support for an expanded supervisory role for central banks, given their oversight of the payment systems into which clearinghouses inject vast swathes of collateral.

“Any use of payment systems, [central banks] need to monitor to ensure continued financial stability as there can be a monetary policy impact,” he said at ISDA’s European conference in London.

Some warn that political wrangling over the future of euro clearing may be detracting from more pressing operational issues as a growing slice of the US$483trn over-the-counter derivatives market is pushed into the cleared environment, either by mandate or in response to new margin requirements that have hiked the cost of uncleared trades.

“The commission giving greater powers to the ECB over euro clearing may get the political tongues wagging, but financial firms are currently worried about overcoming more immediate structural issues,” said Neill Vanlint, managing director of EMEA and Asia at GoldenSource, a data technology provider for financial firms.

He highlighted a proliferation of counterparty information that clearinghouses must manage, with accounts running into the thousands, as well as collateral management considerations that require extensive margin calculations, associated stress tests and new risk management methods.

“One has to wonder whether politicians truly understand these complexities that the industry is currently trying to get to grips with,” he said. (Reporting by Helen Bartholomew)